Arsonists Grab Matchbox in Japan

Pork-Barrel Spending Expert Becomes Finance Minister

It appears it is not enough for Shinzo Abe to attempt to wrest control over the nominally independent Bank of Japan from its board with the aim of getting it to “inflate Japan to prosperity”. The erroneous belief that one can get something for nothing by cranking up the printing presses is of course deeply ingrained all over the world, but as policy options go, it is an especially bad one for Japan with its graying and society and declining population. As we have mentioned before, inflation is about as useful to Japan's citizens as a hole in the head.

Now Abe also wants to add to the debtberg of his government, already the by far biggest in the industrialized world relative to the size of the economy, but more importantly, the most costly relative to the size of the government's tax revenues, even while interest rates are at generational lows.

Aso is the scion of a cement manufacturer, i.e., he has ties to an industry that has always been one of the main beneficiaries of Japan's “artificial life support for malinvested capital” policies over the years. One might as well call him the new minister of bridges to nowhere.

According to Bloomberg:

“Taro Aso, son of a cement magnate and a champion of pork-barrel spending when prime minister, became Japan’s sixth finance chief in three years, auguring expanded fiscal stimulus in the world’s third-largest economy.

The finance minister’s first task will be to deliver on his party’s pledge of a “large-scale” supplementary budget to stimulate the economy, which is forecast to shrink for a third straight quarter. At issue will be averting any sell-off in the bond market as the nation grapples with debt in excess of twice the size of gross domestic product and as Aso calls for a new plan to restore fiscal health.

“Aso’s challenge will be to pursue an expansionary fiscal policy without triggering a rise in bond yields,” said Mari Iwashita, Tokyo-based bond strategist at SMBC Nikko Securities Inc. “It seems the LDP isn’t paying much attention to the bond markets. It’s possible that ratings companies may signal a downgrade as a warning.”

The Liberal Democratic Partymust establish its own “framework” to curb spending and debt expansion, Aso told reporters early this morning after the Cabinet was sworn in by Emperor Akihito. Aso said he won’t adhere to limits made by the previous government to cap new bond issuance for the fiscal year ending March 31 to 44 trillion yen ($514 billion).

“We can see that Japan has completely failed to overcome deflation during the past three years,” Aso said. “Our priority is to ensure Japanese people can perceive that the economy is improving.”

Japan’s sovereign bond risk increased in the run-up to the assumption of power by the LDP, which won elections for the lower house of Parliament Dec. 16. The cost to insure the debt from non-payment for five years rose 14.5 basis points to 86 basis points as of 3:04 p.m. in Tokyo yesterday, from 71.5 basis points Nov. 13, according to data provider CMA. That’s on course for its highest close since Sept. 26, the data show.”

(emphasis added)

We have said it many times, but it should be said again: there is no 'deflation' in Japan and there never has been any. The Japanese true money supply has grown every single year since the bubble has burst, albeit at a far slower rate than during the bubble years. This has led to a barely noticeable, mild decline in prices in those years when productivity growth outran the increase in the money supply. We hasten to add that this is merely a 'rule of thumb' type of statement, as the connection between all these moving parts is of course not mechanical at all. There are leads and lags involved and the effects are both non-linear and influenced by numerous other factors that will differ from time period to time period. However, as a rule of thumb, this is certainly how inflation, productivity growth and prices hang together in principle.

So there is nothing that needs “curing” by the printing press. It is however still more astonishing that Aso and Abe seem to think that they has nigh endless room to maneuver with regard to issuing even more debt. Not only will the spending this debt issuance finances end up just as wasted as all previous stimulus budgets, but there is altogether too much debt extant and the priority should be to lower it, not add to it. By increasing the debtberg further at this juncture, Japan may well lose its last chance to alter the dynamics of what increasingly appears to be an inescapable endgame.

Markets Yawn

To be sure, the markets are so far not overly concerned. As can be seen below, while 5 year CDS on Japanese sovereign debt have indeed increased somewhat lately, spreads are so far still near the low end of their recent range. However, apprehension is likely to grow in view of the aggressive verbiage emanating from the new government.